SEC v. River North Equity LLC
On March 11, 2019, the Securities and Exchange Commission (“SEC”) filed a complaint containing a multitude of charges related to an alleged illegal stock distribution and market manipulation scheme against David Foley and others. See complaint.
The complaint identifies four groups of defendants: David R. Foley, Lisa L. Foley, and Jeffrey A. Foley (collectively, the “Stock Issuers”); Nanotech Entertainment, Inc. (“NTEK”) and Nanotech Gaming, Inc. (“NTGL”), affiliates of the Stock Issuers; Bernnie L. Blankenship (the “Stock Promoter”); and River North Equity LLC, Edward M. Liceaga, and Michael A. Chavez, the unregistered broker-dealers.
David Foley is alleged to be the driving force behind this complicated, multi-year scheme which involved the issuance of convertible debt by NTEK and NTGL, the conversion of that debt into equity shares, and the sale of the shares through defendant River North Equity for cash payments to David Foley and others. David Foley is the founder of NTEK and NTGL, and according to the SEC, maintained control of both entities. The complaint also alleges that his wife, Lisa Foley, was instrumental in facilitating portions of this scheme, as was his brother, Jeff Foley, while David Foley was in prison on unrelated charges.
According to the complaint, defendant Bennie Blankenship promoted NTEK and NTGL on his social media platforms to investors without disclosing his compensation for the promotion. Additionally, River North Equity was primarily engaged in the business of seeking out and purchasing penny stocks from holders of convertible debt instruments and selling those shares. The complaint further alleges that River North Equity facilitated the conversion of convertible debt instruments owned by the Stock Issuers into cash payments primarily for the benefit of the Stock Issuers. The complaint also alleges River North Equity employees, Liceaga and Chavez, facilitated the sale of millions of shares of stock of both NTEK and NTGL at the behest of David Foley, and that they were compensated directly for their participation in the scheme. The complaint quotes Liceaga’s deposition statement that NTEK and NTGL stock sales were coordinated between River North Equity and the Stock Issuers to avoid drops in price that would lead to value loss by any of the defendants.
The complaint further alleges that many of the convertible notes that formed the basis of the unregistered transactions between the Stock Issuers and River North Equity were not identified as liabilities on the books of NTEK and NTGL, and that the money obtained through this scheme was used to infuse cash into both companies to falsely improve the appearance of their financial situation. The complaint also alleges that David Foley falsified paperwork in order to convert the notes into equity and sell the shares to River North while avoiding registration of the transactions with the SEC. The complaint alleges that David Foley used $500,000 of his own funds to purchase NTEK and NTGL stock on the open market to encourage its value appreciation for the purpose of defrauding investors.
The complaint further alleges that while David Foley was in prison, he continued to closely oversee the daily business of NTEK and NTGL with the assistance of, among others, Lisa Foley and Jeff Foley. He requested and received information about NTEK and NTGL and wrote quarterly reports and other documents related to the business, which his brother, Jeff Foley, as Chairman and CEO, would sign at David’s instruction. The complaint alleges that Lisa Foley, at the instruction of her husband, sold more than half of the total shares identified in the complaint for cash and used that cash for impermissible personal and business expenses. The three Foleys allegedly completed paperwork to facilitate the stock sales as exempt transactions, when the transactions were not in fact exempt and should have been registered with the SEC. The complaint also alleges that Chavez acted as an unregistered broker in relation to these transactions. Finally, the complaint alleges that David Foley and Blankenship, the Stock Promoter, purposely manipulated the market for shares of NTEK and NTGL and that all defendants benefitted financially from the scheme.
All defendants to the complaint are accused of violating Section 5(a) and 5(c) of the Securities Act of 1933 (15 USC 77e(a) and (c)), which prohibits sale or delivery after sale of unregistered securities and prohibits the sale of securities without filing registration statements.
David Foley and Blankenship are accused of violation of the following sections of the Securities Act of 1933: 17(a)(1), 17(a)(2), 17(a)(3), 9(a)(2), 10(b) and 10b-5. These charges are comprised of the following: offering securities for sale in a scheme to defraud; obtaining money or property by means of an untrue statement; engaging in a transaction which operates as a fraud on the purchaser; engaging in a series of transactions related to a security for the purpose of inducing others to buy or sell the security; and using manipulative devices in contravention of the rules and regulations of the SEC which are intended to protect investors.
River North Equity and Chavez are accused of violating the requirement that brokers and dealers be registered in order to trade in securities. Liceaga and Chavez are accused in their individual capacities of aiding and abetting the violation of the registration requirements, and Liceaga is accused of aiding and abetting the violation of the registration requirements in his position as a person with control over River North Equity.
The SEC requests that permanent injunctions be entered against all defendants, preventing them from engaging in improper unregistered transactions. The SEC also requests that River North, Liceaga, and Chavez be permanently enjoined from acting as brokers without registering as required by law. The SEC further requests that both David Foley and Blankenship be permanently enjoined from engaging in fraudulent behavior, that they disgorge all of their ill-gotten gains, that they be held liable for civil penalties and that penny stock bars are entered against them. The SEC also requests that David Foley be barred from serving as an officer or director of any public company. The SEC finally requests that the court retain jurisdiction and permit it to go forward to the extent that is permissible given that David Foley filed for bankruptcy.